3.7 Analysing the strategic position of a business Flashcards
SWOT analysis
STRENGTHS –> strong brand name, skilled employees
WEAKNESS –> lots of long-term borrowing, under utilised capacity
OPPORTUNITIES –> gap in market, rising income levels
THREATS –> change in consumer tastes, competitors
SWOT analysis - ADVANTAGES
Low cost and simple technique
Allows business to focus on internal & external factors
Logical structure
Helps managers recognise & assess in risks to the business
SWOT analysis - DISADVANTAGES
Doesn’t take into account everything –> lacks focus
Doesn’t offer any solutions
Can become quickly out of date
Balance Sheets & net assets
A balance sheet represents the businesses assets (possessions) and liabilities (debts) on a particular day
Net assets shows the what would be left to the owners if all assets were sold and all liabilities were paid –> the value of the business
Net Assets = (current assets + non current assets) - (current liabilities + non current liabilities)
Financial Ratios - PROFITABILITY RATIO (roce)
ROCE shows the measure of success of a business through profit
ROCE = operating profit / total equity + non current liabilities x 100
Financial Ratios - LIQUIDITY (current ratio)
Current ratio measures the ability of a business to pay its debts
Current ratio = current assets / current liabilities
Financial Ratios - GEARING
Measures how much of the business is based on borrowed money
Gearing = non current liabilities / total equity + non current liabilities x 100
Financial Ratios - EFFICIENCY RATIOS (payable & receivable days, inventory turnover)
Payable days = payables / cost of sales x 365
Receivable days = receivables / revenues x 365
Inventory turnover = cost of sales / average inventories held
Value of financial ratios when assessing performance - ADVANTAGES
Encourages a systematic approach when analysing performance
Allows managers to evaluate companies performance and compare it to other businesses
Value of financial ratios when assessing performance - DISADVANTAGES
They don’t address issues like product quality, customer service, employee morale
Ratios largely look at the past, not the future
Core competences
Core competences - the unique abilities that a business possesses in order to ensure competitive advantage
Importance of core competences
Allows businesses to take full advantages of opportunities to enhance performance & provide competitive advantage
Core competences add value to the business –> competitiveness and market power increases
Criticisms of core competences
Over zealous outsourcing has damaged business competitiveness
Difficult to identify core competences that are genuinely unique
Possible for a business to become complacent about its core competences
Kaplan & Norton’s Balanced Scorecard model
Developed to help firms measure business performance using both financial and non-financial data.
K & N balanced scorecard model - THE 4 PERSPECTIVES
FINANCIAL –> e.g. revenues from sales, ROCE, cashflow
CUSTOMER –> e.g. customer satisfaction and loyalty
INTERNAL PROCESSES –> e.g. productivity, quality, unit costs
LEARNING & GROWTH –> e.g. training, employee engagement
Balanced Scorecard - ADVANTAGES
Broader view of business performance
Involves everyone in the business (not just financial stakeholders)
Highly flexible
Links performance to long-term vision & goals of the business
Balance Scorecard - DISADVANTAGES
Senior management may still be too concerned with financial performance
Needs to be updated regularly to be useful
Can become complicated due to their being lots of data —> therefore requires strong leadership
Elkington’s Triple Bottom Line
A way of assessing business performance based on 3 important areas including:
1 )Profit
2) People
3) Planet
Elkington’s TBL - PROFIT
Familiar to managers
Figures recorded in a businesses financial statements
Profit helps sustain the broader community in which the business operates within
Elkington’s TBL - PEOPLE
Measures the extent to which a business is socially responsible
Takes into account :
1) Health & safety matters e.g. working conditions
2) Financial matters e.g. fair rates of pay for employees
3) Fair trade –> improving living standards in less developed countries to promote sustainable methods of production
Elkington’s TBL - PLANET
Measures the impact of business on environment
E.g. A business might:
1) reduce carbon emissions
2) reduce quantity wasted
3) using sustainable raw materials
Elkington’s TBL - ADVANTAGES
Encourages businesses to think beyond narrow measure of performance which is just profit
Encourages CRS pyramid
Supports measurement of environmental impact & extent of sustainability
Elkington’s TBL - DISADVANTAGES
Not very useful as overall measure of business performance
Hard to reliably and consistently measure PEOPLE & PLANET
No legal requirement to report it –> so take-up has been poor
Political Environment - ENTERPRISE (financial support)
Enterprise - starting & developing your own business
UK gov supports enterprises –> this encourages ppl to expand & establish their new businesses –> helps reduce the risk of it failing
Political Environment - ENTERPRISE (non financial support)
UK gov provides a range of support, advice & inspiration for entrepreneurs establishing and growing their businesses
E.g. guidance on recruiting staff, marketing, improving leadership
Political Environment - REGULATION ON FREE & FAIR COMPETITION
Regulation - enforcement of rules
1) Imposing windfall taxes (taxes on excessive profits)
2) Controlling prices
3) Restricting ROCE –> prevents excessive profits
Political Environment - REGULATION OF PRIVATISED INDUSTRIES
UK gov privatised many monopolies (single supplier in a market) e.g. gas
Regulators such as OFWAT ensured:
1) consumer interests were protected
2) Monopolies don’t charge excessive prices or make excessive profits
Political Environment - IMPACT OF REGULATION
Threat to businesses as they can’t maximise profits
Adverse publicity
Leads to lower risk decisions
BUT can provide a more stable & long term business environment
Political Environment - INTERNATIONAL TRADE
Selling goods and services to international markets
Links to globalisation –> markets becoming worldwide in scope
Political Environment - IMPACT OF INTERNATIONAL TRADE
Allows businesses access to wider range of customers
Increased sales and lower costs too
HOWEVER… there will be greater competition to deal with
Legal Environment - COMPETITION
1) CARTELS - 2 or more businesses working together to limit competition e.g. controlling prices —> leaves consumers & economy damaged
2) ABUSE OF A DOMINANT MARKET POSITION - economic strength enjoyed by a business –> enables to prevent competition
3) ANTI-COMPETITIVE PRACTICES - actions taken by business to limit rivalry within a market e.g. suppliers agreeing not to sell to competitors
Legal Environment - INDIVIDUAL LABOUR LAW and COLLECTIVE LABOUR LAW
individual labour law - Relates to individual employees e.g. National Minimum Wage Act 1998
Collective labour law - Relates a trade union / group e.g. Trade Union act
Economic Environment - GDP
The total value of a country’s output over a given period of time
Business Cycle includes 4 different stages:
1) RECOVERY - production rises, increase in consumer expenditure
2) BOOM - profits are high but so are costs, increasing inflation
3) RECESSION - demand & profit falls, interest rates are reduced
4) SLUMP - unemployment, low consumer spending
Economic Environment - TAXATION
Payments made to the gov by households and businesses
Direct tax –> tax on income & profits
Indirect tax –> taxes on spending
Different types of tax include:
1) income tax
2) VAT
3) national insurance
4) corporation tax
Economic Environment - EXCHANGE RATES
Price of one currency in terms of another
SPICED
Appreciation - pound rises –> prices of UK exports overseas increases while prices of imported goods in the UK fall
Depreciation - pound falls –> prices of UK exports overseas falls while prices of imported goods in the UK increases
Economic Environment - INFLATION
Persistent rise in price for all goods and services
Consumer Price Index (CPI) - measures the rate of inflation
Economic Environment - EFFECTS OF INFLATION ON CONSUMERS
CONSUMERS:
1) Increase in inflation = money loses its value –> so people lose confidence in money as the value of savings is reduced
2) Increase in inflation lead to higher wage demands as people try to maintain their living standards
Economic Environment - EFFECTS OF INFLATION ON BUSINESSES
ADVANTAGES:
1) Growing revenues + constant gross margin = higher gross profit
2) Higher prices enables revenues to increase
DISADVANTAGES:
1) Inflation leads to increase in costs –> business may not be able to pass them onto customers
2) Inflation = higher interest rates –> reduces economic growth –> recession
Economic Environment - FISCAL POLICY
Use of taxation and gov expenditure to change level of economic activity
Two Types of fiscal policy:
1) EXPANSIONARY - increase level of economic activity
2) CONTRACTORY - reduce level of economic activity
Economic Environment - MONETARY POLICY
Controlling amount of money / interest rates to achieve desired level of economic activity
Economic Environment - MONETARY POLICY (impacts of rising interest rates)
Reduced level of consumer spending
Slows down GDP growth
Decreases inflation –> because people have less money to spend
THEREFORE…
Business may experience falling demand & sales due to increase in savings
Economic Environment - MONETARY POLICY (impacts of falling interest rates)
Reduced levels of unemployment
Increase in GDP growth
THEREFORE…
Demand & sales for businesses are likely to increase
Economic Environment - OPEN TRADE
Open trade involves the removal or reduction of barriers to international trade
INTERNATIONAL TRADING BLOCS - group of countries in a geographical area who aim to protect themselves from other countries outside their group
Economic Environment - PROTECTIONISM
Gov policy to prevent the free entry of imports into a country
E.G.
1) Tariffs - tax on imports
Globalisation
Globalisation - a process in which economies have become increasingly integrated
Importance of Globalisation - ADVANTAGES
1) Increased sales, revenue & profit
2) Cheaper resources
3) Economies of scale ( because of increased production
Importance of Globalisation - DISADVANTAGES
1) Inflation
2) Increased need for investment –> more competition means need more efficiency and R&D
3) Threat of takeover
Importance of Emerging Economies - STRENGTHS FOR BUSINESS’S
Emerging economy - a country with low income per head slowly developing through high economic growth (GDP)
1) Increase in GDP = higher disposable incomes = higher demand = increased sales, revenue and profits for a business
2) Low cost production opportunities
3) Natural resources to exploit e.g. in Brazil
Importance of Emerging Economies - RISKS FOR BUSINESSES
1) Inflation
2) Protectionism from emerging countries
3) Adverse publicity = brand reputation damaged through low costs –> as employees may be exploited through low income
Social Environment - URBANISATION and MIGRATION
URBANISATION - Movement of people from the countryside to live in cities e.g. may move to seek better paid employment
MIGRATION - The movement of people between countries or regions
Social Environment - IMPACT OF URBANISATION & MIGRATION
POSITIVES:
1) increase demand and sales for a business
2) increasingly diverse workforces
NEGATIVES:
1) increased competition e.g. from overseas businesses
Social Environment - GROWTH OF ONLINE BUSINESSES
POSITIVE IMPACTS:
1) lower costs if businesses starting going online
2) less employees needed –> lower unit costs
3) online businesses can reach all over the world
4) relatively cheaper
NEGATIVE IMPACTS
1) Store closures –> redundancies
Social Environment - CORPORATE SOCIAL RESPONSIBILITY (CSR)
The duties a business has towards its employees, customers, society and environment
Level 1 - Economic responsibilities –> be profitable
Level 2 - Legal responsibilities –> obey the law
Level 3 - Ethical responsibilities –> be ethical
Level 4 - Philanthropic responsibilities –> be a good corporate citizen
Corporate Social Responsibility - REASONS FOR
Ethical thing to do
Improves business reputation and brand image
Attractive ethically aware stakeholders
Corporate Social Responsibility - REASONS AGAINST
Businesses don’t know what is in societies interests
Extra costs will be incurred which must be passed on to customers
Efficient use of resources may be restricted
Social Environment - STAKEHOLDER CONCEPT
Purpose of a business is to create value for all stakeholders and not just shareholders.
Business needs to consider and keep interests of customers, suppliers, employees, communities as well as shareholders aligned with the business
Social Environment - SHAREHOLDER CONCEPT
Purpose of a business is just to meet shareholder aims mainly through maximising profits
E.g. increasing share prices and dividends BUT leads to only short term profits for the business
Competitive Environment - PORTERS FIVE FORCES
Analyses competitive strength of a business
Includes 5 forces:
1) threat of new entrants
2) buyer power
3) supplier power
4) rivalry
5) substitute threat
Porter’s 5 Forces - THREAT OF NEW ENTRANTS (barriers to entry)
Barriers to entry - factors that make it difficult for businesses to sell products in a market for the first time e.g. brand loyalty
If new entrants move into an industry they will gain market share & rivalry will intensify
The positions of the existing firms is stronger if the barriers to entry are high HOWEVER if barriers to entry are low, then the threat of new entrants will be high
The threat of a new entrant depends on:
1) customer loyalty
2) how quickly economies of scale can be achieved
3) the new entrant ability to access suppliers
Porter’s 5 Forces - BUYER POWER
Powerful customer are able to exert pressure to drive down prices. This is shown through buyers:
1) finding substitutes from other businesses
2) using extreme power to threaten to switch to cheaper suppliers, thus forcing original suppliers to drive down their prices
Porter’s 5 Forces - SUPPLIER POWER
Reasons for powerful suppliers include:
1) fewer suppliers in market makes them more powerful
2) scarce availability of substitutes gives supplier greater power
If a supplier has greater bargaining power they will:
- sell their products at a higher prices
- squeeze industry profits
Porter’s 5 forces - RIVALRY
Competitive rivalry will be greater when:
1) easy for customers to move to a substitute
2) when there is little differentiation between products sold
3) competitors all have similar corporate objectives
In order for businesses to compete they will:
- engage in competitive pricing
- use of promotional offers and special deals
- use of innovation
Porter’s 5 forces - SUBSTITUTE THREAT
Threat of a substitute is high when:
1) when the price of a substitute product falls, it therefore makes it more attractive to customers
2) when its easier for customers to switch from one substitute to another
If there are substitutes to a businesses product, the business will lower its price to keep customers, but leads to reduced profits
HOWEVER…customer loyalty will limit the extent of this threat
Investment Appraisal - CALCULATING PAYBACK PERIOD
The time it takes for a project to repay its initial investment
Expressed in terms of time e.g. days, months or years
1) Find initial investment
2) Take ‘year 1’ away from initial investment
3) Repeat but with whatever the answer (x) was from step 2
4) When you can’t take anymore away, put x over the last year and x by 365 to work out the days or months
Investment Appraisal - CALCULATING AVERAGE RATE OF RETURN (ARR)
Looks at the total accounting return for a project to see if it meets the target return
Net profit = inflow - outflow
ARR (%) = total net profit / no. of years / initial costs x 100
Investment Appraisal - CALCULATING NET PRESENT VALUE (NPV)
Process of analysing whether investment projects are worthwhile
TIME VALUE OF MONEY –> better to receive cash now than in the future (future cashflows are worth less) AND discount factors bring cash flows back to their present value
1) Calculate PRESENT VALUE = CASH FLOW X DISCOUNT FACTOR for each year
2) Add all present values together
3) Take initial investment away from all the present values added together
Value of sensitivity analysis - PROS AND CONS
The analysis of changes in assumptions used in forecasts
PROS:
- identifies most significant assumptions
- helps assess risk and prepare for a less than favourable scenario
CONS:
- only tests assumptions at a time
- only as good as the data on which the forecasts are based on
- complicated –> not understood by all managers
